Forex reserves crucial for helping rupee: India Forex

NEW DELHI: The rupee has plummeted by more than 12 percent against the dollar during the last three months. However, global economic factors played havoc not only with the rupee, but also other currencies. BRICS peers Brazil and South Africa have seen their currencies slide down by 15.38 percent and 10.61 percent, respectively, against the dollar since March. Only the yuan, which is tightly controlled, holds steady depreciating by 0.43 percent.

The world at large is feeling the pinch of a global slowdown and stronger dollar. It becomes essential for countries to maintain their economic growth to make efforts to improve local fundamentals. Looking at the growth forecast of the BRICS, Brazil is expected to slow down to 3.02 percent from 6.09 percent, China to 8.23 percent from 14.16 percent, Russia to 4.01 percent from 8.53 percent, and South Africa to 2.65 percent from 5.54 percent for the year 2012. (The year of comparison is 2007.)

The US economy is no different in this aspect either. Expected growth for the current year is above 2 percent only. The US' outstanding public debt currently is above 100 percent of GDP, while its federal deficit for fiscal 2012 totaled $1.2 trillion, i.e. 8.7 percent of GDP. Its current account deficit hit $473 billion in 2011, i.e. 3.2 percent of GDP.

In comparison with the US economy, India's GDP is expected to grow by around 7 percent, while its public debt-to-GDP ratio was a far lower at 66 percent in 2010-11. The country's economic metrics are much better than the US' and yet the rupee is weakening against the dollar -- the reason being the safe-haven status of the greenback.

Eurozone uncertainties and the probable exit of Greece from the European Union are making investors risk-averse among speculation that there may be another massive global crisis. This is making them rush to US treasuries, and even German and Japanese sovereign bonds which are considered safe bets in spite of the lower returns they fetch.

In the case of India, growth is being burdened by global as well as local factors, putting pressure on financial markets. There are certain steps we can take, such as attracting dollar flows through FDIs rather than FIIs, to reduce the current account deficit. Foreign direct investment in India in 2010 was $44.8 billion and increased 25 percent to $50.8 billion in 2011.

However, compared to other Asian peers, like China, it is comparatively a very small figure. China received more than $ 185 billion in 2010, the highest among Asian countries. Policies and measures to attract FDI should be adopted and promoted. Political uncertainties, however, make it difficult to implement and execute the same. Fiscal consolidation should be another agenda.

As the rupee has depreciated from August 2011, when the currency was at the 46 levels, it is difficult to control the trade deficit since the floating exchange rate has made the dollar stronger. The weakening of the rupee makes it difficult to reduce the trade status quo as we are a net importer nation. The situation is quite grave at this time with slowing economic growth and a weakening currency.

The RBI had taken various measures to support the rupee. It has intervened at regular intervals, but in vain. In fact, due to its regular intervention, forex reserves are declining. The forex reserves fell below $ 300 billion compared to China's $ 4 trillion and Japan's $ 1 trillion. Brazil and Korea too are in a better position.

In 2007, the Indian economy entered the group of $1 trillion economies. India had forex reserves of $ 272 billion. Switching to now, when our economy is touching $1.6 trillion, our forex reserves are only at $ 291 billion. In 2010, forex reserves touched $ 300 billion after which it was seen declining steadily. India's rank in the list of the largest economies by forex reserves has slipped to tenth in 2012 from fourth in 2009. Consistency in building up forex reserves is very crucial to help the weakening rupee.

The rupee made new lows of 56.40 levels against the dollar. The 56.25 levels saw good resistance after which the currency appreciated to the 55.27 levels. The market could witness a temporary correction up to the 54.90 levels. Local fundamentals would take some time to improve as they need certain actions to be taken by the central government. The overall bias is still bullish for dollar/rupee since the euro crisis will keep the global market jittery as the dollar index may approach the 83-84 levels.

(The views expressed in this column are the analyst's own and do not represent those of EconomicTimes.com)